Systemic risk to finance and corporate world as fossil fuel demand to hit peak

Demand for fossil fuel will peak in the 2020s, bringing systemic risk to the financial markets and the threat of disruption to wider industries, claims a new report from a London-based think tank.

The global energy system is transitioning from being based mainly on fossil fuels to one based mainly on renewable energy sources. This shift will involve the near-term peaking of fossil fuel demand, an “S curve” of renewable growth, and a long-term decline in demand for fossil fuels, says the report from the Carbon Tracker Initiative.

Peaking fossil fuel demand will have a dramatic impact on financial markets in the 2020s, and will lead to falling prices, rising competition, sector disruption and stranded assets for the wider business world, the research claims.

The news sends a stark warning to risk managers whose companies may be vulnerable to the dramatic changes predicted in the report – which extend far wider than just oil and gas incumbents.

“The sectors impacted by the energy transition are wide and not just limited to fossil fuel stocks,” commented the report’s author Kingsmill Bond, new energy strategist at the think tank. “Outside the obvious areas of coal, oil and gas, they include capital goods such as gas turbines, transport such as coal ports, and automotive.”

The amount of cash at risk is described as “colossal”: The fossil fuel sector has built assets with a value of around $25 trillion (£19 trillion) and the fossil fuel and related sectors compose up to a quarter of equity and debt markets.

“There is systemic risk to financial markets as they seek to digest vast amounts of stranded fossil assets, country risk to petrostates that fail to reinvent themselves in time, and corporate risk in sectors across the world, from drilling to diesel engines, from transport to banks,” Bond said.

With a heightened focus on climate change and renewable energy, investors will increasingly be scrutinizing companies and penalizing those who fail to meet expectations, Sebastian Ljungwaldh, energy analyst at Carbon Tracker, told Corporate Risk and Insurance.

“Investors in general are becoming increasingly aware of climate risk in general in their portfolios, and you can see a real spread of how sophisticated that approach is – whether it’s looking at absolute greenhouse gas emissions in value chains, or potential [capital expenditure] at risk in the oil and gas sector if we were to align to a two degree world,” he said.

“There is an increasing awareness, and increasingly there are different ways of looking at what lens to adopt to assess that risk.”

Many investors are engaging more thoroughly with companies in order to understand their climate risks – and in some case even blacklisting those that are involved with industries such as coal.

“These are the sort of actions investors are taking at the moment, and I think further scrutiny will only evolve as this plays out,” Ljungwaldh said.

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